A well-engineered retirement

Bristol pensioner David Parslow has been investing for income since he retired 12 years ago. A former manager in the aero-engines repair division of Rolls-Royce, he took early retirement at 54, leaving with a monthly pension of about £490. His wife Joyce retired two years later with a pension of about £180 a month.

He estimated they would need another £200-£300 a month to live comfortably, so invested £50,000 in the Prudential with-profits bond through a 'back-to-back' arrangement. This is where a portion of capital is used to buy an annuity to provide a regular and consistently high level of income for five or 10 years, while the rest is invested in a bond. The bond is left to grow during the five or 10 years, and by the time the annuity has finished paying out, it should have recovered the cost of the annuity. Income can then be drawn down from the bond or you can repeat the process of buying an annuity.

This provided Mr Parslow with the income he required, and the bond is now worth about £58,000.

Since his first bond investment, he has put another £80,000 into the Scottish Widows with-profits bond (which in addition to £4,000 income a year also produced a windfall payment of £20,000 when the insurer demutualised last year), £50,000 with Scottish Equitable (£2,700 income) and £50,000 with CGU (now Norwich Union) which should produce about £2,500 when the first lot of income is paid out.

Mr Parslow does not take out all the income available from his bonds, preferring to leave some growth to add to their value. He also invests through the Bath discount broker Chartwell because it rebates commission on the deal, enhancing the value of his investment.

In addition to his with-profits bonds, he has invested in several Isas and their precursors, Peps, all with the intention of generating income. He chooses corporate-bond funds because these are generally lower-risk than equity income funds. His portfolio includes bond funds from Legal & General, M&G and Norwich Union.

Most income funds offer two types of unit - one that pays out income and another that rolls the income up by buying new units at a very low 'creation' cost. However, Mr Parslow increases the value of his capital overnight by withdrawing all his income and reinvesting it via Chartwell in funds with no initial charge but which do pay commission. This means that not only is all his money invested on his behalf, but he also benefits from a commission rebate from the discount broker.